Tokenisation of money and assets has great potential, but initiatives to date have taken place in silos without access to central bank money and the foundation of trust it provides.
A new type of financial market infrastructure – a unified ledger – could capture the full benefits of tokenisation by combining central bank money, tokenised deposits and tokenised assets on a programmable platform.
As well as improving existing processes through the seamless integration of transactions, a unified ledger could harness programmability to enable arrangements that are currently not practicable, thereby expanding the universe of possible economic outcomes.
Multiple ledgers – each with a specific use case – might coexist, interlinked by application programming interfaces to ensure interoperability as well as promote financial inclusion and a level playing field.
Introduction
Throughout history, developments in the monetary system and society at large have been closely interwoven. This interplay has been a story of one side pulling the other, leading to dramatic leaps in economic activity over time. On the one hand, the evolving needs and demands of society have spurred the monetary system to adapt. On the other hand, key innovations in money and payments have unleashed latent demand for new types of economic activity that have led to dramatic spurts of economic growth and development.
The rapid expansion of trade and commerce over the past 500 years would be scarcely imaginable if buyers and sellers still had to cart around heavy chests full of metal coins to pay for goods and services. The advent of money in the form of book entries on ledgers overseen by trusted intermediaries opened the door to new financial instruments that bridged both geographical distance and the long lags between the delivery of goods and settlement of payments.1 With the advent of the electronic age, paper ledgers became digital, adding impetus to the "dematerialisation" of money as well as claims on financial and real assets. Electronic bookkeeping accelerated paper-based processes, allowing accounts to be updated at the speed of light. Through dematerialisation and digitalisation, the interplay between money and the economy has wrought profound changes on society at large.
Today, the monetary system stands at the cusp of another major leap. Following dematerialisation and digitalisation, the key development is tokenisation – the process of representing claims digitally on a programmable platform. This can be seen as the next logical step in digital recordkeeping and asset transfer. Tokenisation could dramatically enhance the capabilities of the monetary and financial system by harnessing new ways for intermediaries to interact in serving end users, removing the traditional separation of messaging, reconciliation and settlement. Tokenisation could unlock new types of economic arrangement that the frictions inherent in the current monetary system have hitherto made impractical.
Crypto and decentralised finance (DeFi) have offered a glimpse of tokenisation's promise, but crypto is a flawed system that cannot take on the mantle of the future of money.2 Not only is crypto self-referential, with little contact with the real world, it also lacks the anchor of the trust in money provided by the central bank. While stablecoins have mushroomed to fill this vacuum by mimicking central bank money, the implosion of the crypto universe in the past year shows that there is no substitute for the real thing. Away from crypto, efforts by commercial banks and other private sector groups have explored the capabilities of tokenisation for real-world use cases. But these efforts have been hampered by the silos erected by each project and the resulting disconnect from other parts of the financial system. These projects also lack integration with a tokenised version of the settlement asset in the form of a central bank digital currency (CBDC).
The collapse of crypto and the faltering progress of other tokenisation projects underline a key lesson. The success of tokenisation rests on the foundation of trust provided by central bank money and its capacity to knit together key elements of the financial system. This capacity derives from the central bank's role at the core of the monetary system. Among its many functions, the central bank issues the economy's unit of account and ensures the finality of payments through settlement on its balance sheet. Building on the trust in central bank money, the private sector uses its creativity and ingenuity to serve customers.3 In particular, commercial banks issue deposits, the most common form of money held by the public. Supported by regulation and supervision, this two-tiered structure preserves the "singleness of money": the property that payments denominated in the sovereign unit of account will be settled at par, even if they use different forms of privately and publicly issued monies.
While the current monetary system has served society well, pinch points in the system that emerge from time to time highlight the frictions that users chafe against. These frictions result from the current design of the monetary system where digital money and other claims reside in siloed proprietary databases, located at the edges of communication networks. These databases must be connected through third-party messaging systems that send messages back and forth. As a result, transactions need to be reconciled separately before eventually being settled with finality. During this back-and-forth process, not only do participants have an incomplete view of actions and circumstances, but the uncertainties and misaligned incentives preclude some transactions that have clear economic rationale. While workarounds such as collateral or escrow can mitigate such frictions, these solutions have their limits and create their own inefficiencies. Tokenisation is a more fundamental route towards addressing the shortcomings of the current system.
New demands are also emerging from end users themselves as advances in digital services raise their expectations. Indeed, these emerging demands may be just the tip of the iceberg. As services delivered through smartphone apps make deep inroads into people's daily lives, users expect the same seamless operation of the monetary and financial system as the seamless interactions of apps on their smartphones. These demands are beginning to outgrow the siloed domains and their reliance on the to-and-fro processes at the edges of the network.
This chapter presents a blueprint for a future monetary system that harnesses the potential of tokenisation to improve the old and enable the new. The key elements of the blueprint are CBDCs, tokenised deposits and other tokenised claims on financial and real assets. The blueprint envisages these elements being brought together in a new type of financial market infrastructure (FMI) – a "unified ledger".4 The full benefits of tokenisation could be harnessed in a unified ledger due to the settlement finality that comes from central bank money residing in the same venue as other claims. Leveraging trust in the central bank, a shared venue of this kind has great potential to enhance the monetary and financial system.
A unified ledger transforms the way that intermediaries interact to serve end users. Through programmability and the platform's ability to bundle transactions ("composability"), a unified ledger allows sequences of financial transactions to be automated and seamlessly integrated. This reduces the need for manual interventions and reconciliations that arise from the traditional separation of messaging, clearing and settlement, thereby eliminating delays and uncertainty. The ledger also supports simultaneous and instantaneous settlement, reducing settlement times and credit risks. Settlement in central bank money ensures the singleness of money and payment finality.
Moreover, by having "everything in one place", a unified ledger provides a setting in which a broader array of contingent actions can be automatically executed to overcome information and incentive problems. In this way, tokenisation could expand the universe of possible contracting outcomes. The unified ledger thus opens the way for entirely new types of economic arrangement that are impossible today due to incentive and informational frictions. The eventual transformation of the financial system will be limited only by the imagination and ingenuity of developers that build on the system, much as the ecosystem of smartphone apps has far exceeded the expectations of the platform builders themselves. Even in the near term, a unified ledger could unlock arrangements that have clear economic rationale. Possibilities include new types of deposit contract that bolster financial stability, improvements in supply chain finance and new ways to improve the financial system's resilience and integrity.
The unified ledger concept can be broad or narrow, with the first instances likely to be application-specific in scope. For example, one ledger could aim at improving securities settlement, while another could facilitate trade finance in supply chains. Tokenised forms of money would figure in each ledger to provide the transaction medium. Each unified ledger would bring together only the intermediaries and assets required for each application. The scope of a ledger will also determine the relevant players that must be involved in the governance arrangements. Separate ledgers could be connected through application programming interfaces (APIs), or, as their scope expands over time, they could incorporate additional assets and entities, or merge together.
Some of the benefits envisaged from the unified ledger could be reaped by interlinking existing systems through APIs into a "network of networks". While such a network of networks would still consist of separate systems and fall short of fully fledged programmability across systems, the worst drawbacks of siloed systems could be mitigated.
This next stage in the financial system's journey will be one that combines the best efforts of both the private and public sectors. Central banks could work with regulated private entities to develop technological solutions and standards to meet specific use cases. With their public interest mandate, central banks are best placed to establish a common venue for each use case by interlinking with the monetary system. Proper oversight and supervision will be a prerequisite for this endeavour.
In embracing evolution and change, central banks and the private sector should follow key guiding principles to ensure that the monetary system harnesses innovation for the public interest. First, the tried and tested division of roles between the public and private sector in the two-tiered system remains the cornerstone. The second principle is upholding a competitive level playing field that promotes innovation and financial inclusion. And third, the future monetary system needs to meet the highest standards of data security and privacy, while ensuring system integrity by guarding against illicit activity such as money laundering, financing of terrorism and fraud.
The rest of the chapter introduces the concept of tokenisation and how it could be mobilised in the design of key elements of the future monetary system: central bank digital currencies, tokenised deposits and tokenised claims on financial and real assets. The chapter then proposes unified ledgers to integrate these components seamlessly. Concrete examples show how this kind of integration could improve the old and enable the new. The final section discusses high-level guiding principles on scope, governance, incentives for participation, operational resilience and privacy.
Tokenising money and assets
The blueprint for the future monetary system rests on several key concepts surrounding tokenisation.
Tokenisation basics
Traditional ledger systems and tokenised systems operate under fundamentally different rules. In traditional ledger systems, account managers are entrusted with maintaining and updating an accurate record of ownership. In contrast, in a tokenised setting, money or assets become "executable objects" that are maintained on programmable platforms. They could be transferred through the execution of programming instructions issued by system participants without the intervention of an account manager. While tokenisation does not eliminate the role of intermediaries, it changes the nature of that role. The role of the operator in a tokenised environment is as a trusted intermediary serving in a governance role as the rule book's curator, rather than as a bookkeeper who records individual transactions on behalf of account holders.
The claims traded on programmable platforms are called tokens. Tokens are not merely digital entries in a database. Rather, they integrate the records of the underlying asset normally found in a traditional database with the rules and logic governing the transfer process for that asset (Graph 1). Hence, whereas in traditional systems the rules that govern the updating of asset ownership are usually common to all assets, tokens can be customised to meet specific user or regulatory requirements that apply to individual assets. We discuss in a later section how this dual nature of tokens could be used to good effect in a supervisory and compliance setting by directly embedding supervisory features into the token itself, which can be tailored to specific rules.
Graph 1
Tokenisation – the process of recording claims on financial or real assets that exist on a traditional ledger on a programmable platform – introduces two important capabilities. First, by dispensing with messaging and the reliance on account managers to update records, it provides greater scope for composability, whereby several actions are bundled into one executable package. Second, it enables the contingent performance of actions through smart contracts, ie logical statements such as "if, then, or else". By combining composability and contingency, tokenisation makes the conditional performance of actions more readily attainable, even quite complex ones.5
This chapter examines several use cases of such contingent performance of actions. One is in the design of supply chains in which several participants interact under uncertainty and with incentives that may not be perfectly aligned. Another example is the design of banking deposit contracts where built-in contingencies that depend on the actions of other depositors alter the incentives of depositors to be a first mover in a bank run setting. Such contingent deposit contracts could nullify the so-called first-mover advantage.
Many interesting real-world applications require the tokenisation of assets that currently exist in traditional databases. These assets could range from financial securities whose ownership is recorded in securities depositories to real assets, such as commodities or real estate. The tokenisation process for such assets occurs through so-called ramps that define a mapping between assets in traditional databases and their counterparts in tokenised form (Graph 2). The assets in the traditional database are immobilised or "locked" to serve as collateral that backs the tokens issued on the programmable platform. The locking of assets ensures that the transfer of their tokenised counterparts guarantees the transfer of the underlying assets.
Graph 2
Source - Bank for International Settlements
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